Uncertainty and inequality in early financial thought: John Hicks as a reader of Knight and Keynes

Abstract

The article examines the early reception of Knight’s and Keynes’ accounts of uncertainty and their overlooked role in the development of financial economics. Knight’s famous distinction between risk and uncertainty bore a deep social and political significance, dividing humanity into risk-takers and the risk-averse. This same distinction, I argue, along with its asymmetries of power and rewards, was reproduced in Hicks’ 1939 dynamic equilibrium model. It was recast as an opposition between hedgers and speculators in a market for risk, on the one hand, and between institutional investors and the general public, on the other. Hicks’s synthesis heeds both Knightian and Keynesian notions of uncertainty, adopting the former’s idea of profit-earning uncertainty-bearers and the latter’s definition of money as an imperfect though widely used hedge against uncertainty. Closer to Knight than to Keynes, Hicks’s model raises a fundamental political question: is inequality a price worth paying for greater certainty in economic life?